Toronto Income Property Newsletter: April 2008

I’m sure that everyone is as happy as I am that spring is almost here. I think we’ve seen the last of the heavy snow and the biting cold. It couldn’t have happened quickly enough as the bad weather slowed down the business for the months of February and March, particularly with income properties in the downtown core. I mentioned last month that a lot of opponents of the new municipal land transfer tax were pointing to these monthly decreases as the result of buyers not wanting to pay this new tax. It is very difficult to make this argument when the three weeks after the implementation of the new tax had the worst weather in almost seventy years. Take my word for it – when there’s a snowstorm, we agents don’t like to go out and show properties – especially tenanted properties. So with fewer showings come lesser sales. That’s my take on it. If the market continues to be down in April and May then we’ll have something to talk about.

While we’re talking about a potential downtown in our real estate market, Garth Turner has released a new book called “Greater Fool” that I suspect will get a lot of attention. In it he basically suggests that our Canadian experience is not that far removed from the recessionary tendencies of the U.S. and a day of reckoning is coming. He examines the myths and counters with the facts. He dissects the American sub-prime experience and finds that the problems go far beyond mortgage products, and also reach into Toronto, Calgary and Vancouver.

I comment on this because Garth is one of Canada’s leading real estate forecasters and a lot of folks subscribe to his views. He also backs up a lot of his theories with historical data. I can’t say where the market is going after a frigid two months, but I’m still seeing multiple offers on many properties. There is also a lot of new inventory hitting the market. If the prices were too high on these new properties, the multiple-offer process would die – and that hasn’t happened yet.

It stands to reason though that the status of our economy will parallel the American situation. Canada is right now moving along with the U.S. towards recession. In fact the whole world is heading towards recession. Naturally a lot of industries are tied to what happens in the U.S. so logically it should only be a matter of time before our real estate market starts to suffer. I just don’t think it will or even can happen overnight, so we’ll see the signs well in advance. I promise as soon as it starts (if it ever does) then I’ll let you know about it.

When I meet new clients or novice investors they often ask what happens if at some point during ownership of their income property something goes wrong with the tenant relationship. Naturally we would all like to avoid trouble or disputes at all costs, but sometimes we can have a difference of opinion that could cause friction with tenants.

One of the best resources for landlords in the GTA is the Ontario Rental Housing Tribunal. The Tribunal resolves disputes between landlords and tenants about rights and responsibilities under the Tenant Protection Act (TPA), including rent increases, evictions and privacy issues.

• The system resolves disputes in a less formal environment than found in provincial courts.

• Landlords and tenants of most residential rental units are covered under the TPA, including high rise rental units, single family homes, basement units, rental condominiums, care homes, and mobile homes.

• Some units are partially covered by the TPA, including new residential complexes, and government owned and non-profit housing units.

• Some accommodation is completely exempt from the TPA, including units with a kitchen or bathroom shared with the owner, and temporary accommodation such as hotels and motels.

They are an independent, quasi-judicial agency. In mediation, a Tribunal mediator will help a landlord and tenant to resolve a dispute and reach an agreement they are satisfied with. In adjudication, a hearing may be held. A Tribunal member makes a decision based on the evidence examined, and issues an “order.” The Tribunal also provides landlords and tenants with further information about the rights and obligations each has under the Tenant Protection Act. It is an invaluable service that has helped relations between landlord and their tenants.

Another wonderful resource is www.landlordselfhelp.com. This site is geared towards small scale income property owners and they do a bang-up job of offering informative tips and advice. I also always recommend checking out our website (www.plex.ca) as I make sure that we update it with the most relevant and poignant links

The last topic I’d like to address is for all my existing clients who are looking to buy income properties for investment only. I have been keeping a lot of buyers at bay, essentially advising them to wait until prices stop increasing and returns get a little stronger. The question then becomes, given that income properties continue to sell in top neighbourhoods, what is the minimum return that should be acceptable? How low should a cap rate go given that buildings tend to appreciate in the future and we continue to have a very strong rental market?

My answer is simple – seven.

If you see a seven cap or better on paper and the property is in a good area and has some upgrade potential, then I would pursue it. Financials statements have a tendency to sometimes forget key expense items, so usually the stated cap rate is going to be less. I know that over the past three years, marquee income properties have sold for four and five caps based on their neighbours, but if you’re not going to live in them, I believe that this return is simply too low. Given the responsibility of being a landlord, you would like your property to outperform a paper-based investment. If I don’t see a seven cap on the listing, then there are better places to put your money. Of course if you are going to live in the property, it’s a different story entirely. You can accept a lower cap rate if you can derive ulterior benefits by residing there.

I’d like to thank everyone that ordered a copy of my new “Live for Free” guide. It is still available for sale on the Plex website (www.plex.ca) and www.amazon.com if you’d like to get a hard or digital copy.

That’s it for this month. I realize that with an early Easter in March there are no more long weekends until the end of May, so work hard and have fun everybody during this long stretch.

Go Toronto FC!

P.

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